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Tourism Surcharge to Promote Rural Electrification in Mexico

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Overview

The concept of "sustainable tourism" is not new. But it has usually been limited to environmental issues and, occasionally, cultural aspects. Here, however, sustainable tourism is not only taken to mean environmental friendliness, but also an improvement of the local social and economic structures. This tourism counterbalances the standards of living between the industrial nations and the Third World, on the one hand, and between regions within the Third World / developing nations on the other. This balance is to be achieved with a tourism fee charged per person / night. Mostly paid by foreign tourists, this surcharge is to be devoted to financing rural electrification in Third World countries, thus also benefiting rural development overall and improving the environmental standards in tourist hotels.

Tourists will also benefit from this surcharge, as it will help reduce tensions within society. A calming of tensions will indirectly increase the safety of tourists, making travel destinations even more attractive. Some tourists may even have a better conscience with the knowledge that their vacation is a contribution to sustainable development.

For this concept to work, this fee will have to be designed as a dedicated levy rather than a general tax. In other words, the revenue from these levies must be used for a specific purpose. This direct allocation is necessary for two reasons: first, to ensure that the funds collected can be used for a specific purpose; and second, to be able to "sell" the idea to tourists. The latter goal is especially important for the acceptance of the levy. If the levy can be communicated correctly, it will not reduce the demand for tourist resorts in Mexico, but rather attract even more tourists.


Some Basic Data on the Importance of Tourism for Mexico's Economy[1]

  • Tourism is one of the most important economic sectors in Mexico, making up 9.4 % of the gross national product. Mexico is a "tourism giant" even on an international scale. In 2000, Mexico was the 8th most popular travel destination, with 20.6 millions arrivals.
  • The tourism sector is the largest "employer" in Mexico, offering some 3.2 million jobs. Some 9.5% of all employees work in this sector.
  • In addition, the tourist sector will probably grow faster than any other industry in Mexico in the next few years. The Word Travel & Tourism Council forecasts a 7.7annual growth rate (in terms of constant prices) up to 2012.

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Specifics and Adaptation of the Proposal to Mexico

The taxes and levies used in the tourist sector fit into two categories:

  1. Directly charged to tourists (Entry/exit taxes, Air passenger duty, Hotel/accommodation (bed-night tax),Restaurants (VAT))
  2. Charged to tourism business (Fuel tax, Duties on the import of tourist equipment, Property and corporation taxes)


Based on an analysis of these commonly used charges for the tourism sector, a similar proposal was worked up for introduction on the Balearic Islands at the beginning of this year.

In this proposal, the charges are based on the number of nights spent. It is also proposed that the levy be based on the ranking of the hotel. For example, the surcharge for a one-star hotel might be US$ 0.50 per night, while the surcharge for a five-star hotel would be US$ 3.


This type of levy has several advantages over other types:

  • The levy takes the various income levels of the tourists into account.
  • The levy is based on the degree at which tourists use resources (beach, infrastructure, sights).
  • The levy is mostly paid by foreigners. As they do not generally vote in the country, little resistance to such a levy is expected outside of the tourist sector.


The proposed model for a levy on tourism in Mexico is based on a levy system introduced on the Balearic Islands at the beginning of 2002. However, we recommend using the funds for a different purpose and communicating the concept for the levy differently. On the island of Norderney, a similar levy system has been introduced successfully. The two examples are documented in the lecture held during the workshop in Mexico (see appendix page 214f).

Other countries already use a levy on tourism or tourist tax to a considerable extent. For instance, Cuba charges an entry and exit fee of $20 each way. The entry fee for the Seychelles is $90 per person.

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Inflow of Funds and Proposed Use of Funds

A basic model calculation was created to determine the inflow of funds. Here, it was assumed that the roughly 20 million tourists that visit Mexico each year spend an average of 5 days in a hotel.

The total inflow of funds from this surcharge is estimated at US$ 160 million per year based on the distribution of tourists across hotel categories (one to five stars):


Table 1: Nights and revenue based on the proposed surcharge. (Data are estimated)
Nights and revenue based on the proposed surcharge. (Data are estimated)

The average surcharge each tourist has to pay only amounts to US$ 8. In terms of the overall costs of the trip, this fee will probably not even amount to 1% in almost all cases.


The following structure is proposed for the use of the tourist levy:

  • The biggest part should be used to improve the access of sustainable energy in rural and low-income areas. It could be used to subsidize the Solar Home Systems (SHS) which will be installed in off-grid areas.
  • About a quarter of the incoming money should be used to finance programmes to "green" the tourism-sector (efficient energy and electricity use, solar energy for heating water, water-saving technologies, waste management)
  • Another part could be used to finance demonstrations of renewable and efficient energy supply at the most visited points of the country.
  • Last but not least, it would be an important task to teach the workers in the tourism-sector about environmentally friendly behaviour.
Figure 1: Use of the inflow of funds from the surcharge
Use of the inflow of funds from the surcharge


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Effects on Rural Electrification

The original costs for a Solar Home System (SHS) are around US$ 800. Such a system can power, for instance, three energy-saving lamps, a radio, and a television (< 20 watts of consumption).

With a budget of around US$ 80 million annually and a subsidy quota of 70% of the original costs, some 150,000 households or 750,000 people could be provided with solar power systems annually. In other words, the tourism levy could provide power to all off-grid households (some 1 million, or 5 million people) within around 7 years. In most cases, SHS would be used, but in exceptional cases other regenerative sources of energy or hybrid systems would be used.

In addition, tourism could be made more environmentally friendly and attractive

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Pros and Cons of a Tourism Surcharge

One argument against the tourism levy is that the price elasticity of demand is not known and that the elasticity of demand might lead to a reduction in Mexico's overall income from the tourism industry. It would be possible to clarify and test this potential weakness of the levy in studies and surveys.

In many cases, however, the attractiveness of the tourist resort would be much more important than the amounts charged in this levy. An overview of the taxes in various cities illustrates this (see figure below). Although London charges the highest taxes, more than 25 million people visit it every year. Based on a defined product mix (rental car, hotel, expenditures in restaurants, etc.) and a stay of 5 days and four nights, a tourist in London pays US$ 341 in taxes alone.[2]

Figure 2: High taxes do not necessary mean less tourism. Source: Durbarry 2000)
High taxes do not necessary mean less tourism. Source: Durbarry 2000

Another argument against a tourism levy is the collection costs it entails.

In addition to the above arguments, there are three other aspects that speak in favour of a tourism levy:

  1. The political acceptance of a tourism levy is expected to be great. Except for the tourism industry itself, there probably will not be any major interest groups that fight such a levy as the money will basically be paid by foreign tourists.
  2. As the tourism market can be expected to continue to grow1, the revenue from this levy would also increase.
  3. The average burden on individual tourists is slight and will hardly be noticeable in many cases.

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Findings and Assessment

Even a small tourism levy could further the electrification of rural areas in Mexico significantly.

Three kinds of concerns:

  1. On the one hand, there is concern that this levy might reduce competitiveness with competing countries.
  2. Then, there is the question of how to ensure that the levy is dedicated to a specific goal.
  3. Finally, it was pointed out that electrification is the duty of individual states and communities and that the federal government thus has no direct influence on the realization of electrification.

However, Mexico is a developing nation that cannot expect to get (much) financing for electrification from outside the country, as there are much poorer countries in the world. In other words, the financing will have to come from within the country. A levy on tourism is certainly one of the most interesting means of financing.

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Further Information

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References

  1. World Travel & Tourism Council (WTTC) - http://www.wttc.org/
  2. Durbarry 2000